St. George’s, NL – “Finance Minister Loyola Sullivan’s Monday budget was full of unexpected windfall revenues, but despite that remarkably good fortune he was still unable to bring the Newfoundland budget into balance. That is a wasted opportunity for the people of Newfoundland and Labrador, whose future is mortgaged by the province’s debilitating level of debt,” says Peter Fenwick, research fellow with the Atlantic Institute for Market Studies (AIMS).

Newfoundland’s strong economic growth and hard nosed bargaining with Ottawa have helped increase provincial revenues by 13 per cent since 2003. Strong revenue growth helps close the deficit gap, but only when a government makes the tough decisions. In St. John’s yesterday, that didn’t happen.

There’s lots of money, but much of it is from non-repeatable windfalls that if properly spent could have put Newfoundland and Labrador firmly on the road to debt reduction, and therefore more sustainable public finances. Instead, the opportunity was squandered by short-term decisions to spend much of the money, often unwisely, on schemes that have already proven that they produce little of value.

A large part of the windfall profits the province received, and is counting on in the future, comes from the offshore. This is not revenue to be depended on to pay for day-to-day operations. Oil revenue is money from the sale of a non-renewable asset that should not be squandered and cannot be depended on year after year. In fact by the province’s own estimate, oil revenue is scheduled to decline starting in fiscal year 2007.

“Monday’s budget fell short by not directing revenue from the non-renewable oil resources toward closing the gap. Simply put, if growing government revenues are not readily turned into debt reduction and sustainable spending levels then the province’s fiscal health will not improve,” said Mr. Fenwick.

Furthermore, the Newfoundland government appears to have abandoned its plan to systematically reduce the size of the provincial civil service. According to a recent study by AIMS researcher David Murrell, of the ten provinces, Newfoundland and Labrador has the second highest ratio of general government civil servants to residents. Only PEI has more employees per person on the government payroll.

Newfoundlanders are burdened with the highest per capita provincial debt in the country. Based on this year’s budget plan, provincial debt will rise to $16,610 per capita as of March 2006. Closing the budgetary gap and planning to balance the books in 2006-2007 on a cash basis is a positive step, but the challenge will be to reduce the annual accrual deficit, which will add almost $500 million to the provincial government debt this year, and will add nearly $400 million per year until 2007. Though progress in matching spending on government operations with government revenue is good news, it will do little to reduce levels of public debt.

A full 20 cents of every dollar the province takes in goes to servicing the debt. Until the deficit gap is closed, both on a cash and an accrual basis, prospects for net debt elimination are bleak.

If the windfalls of the past year were applied directly to the huge provincial debt, the province might have brought its out-of-control finances to manageable levels. As a second best strategy the province could have reduced some of the taxes that it takes from its citizens. As it was, the only tax cut was on club-bought liquor, and that only to offset the potential loss in video lottery revenues as the province plans to reduce the number of terminals.

Unfortunately the province is still spending on rather dubious initiatives such as the rural secretariat and on revolving funds for small businesses, programs that have been spectacularly unsuccessful in the past. Jurisdictions do better when they reduce taxes and limit their expenditures, allowing the private sector to create a vibrant economy with the taxes that are left in people’s pockets.

Growing government is the single largest threat to Newfoundland’s fiscal health. As the province’s economy grows, the debt to GDP ratio may decline, but every year each Newfoundlander’s share of the debt grows. Worst still, 20 cents of every dollar raised will be needed to pay for spending from one generation ago. Even a great year for revenue growth was not enough to change that.


For further information, please contact:

Peter Fenwick, AIMS Research Fellow – 709-644-2273